Regulation Y - Frequently Asked Questions

Q: For purposes of the calculation of total equity in section 225.34 of the Board’s Regulation Y (12 CFR 225.34), how should the denominator of the total equity formula, "Issuer Shareholders' Equity" be determined?
Posted: 9/30/2020
A: Under section 225.34(b)(1), a first company’s total equity in a second company is equal to the sum of the first company’s Investor Common Equity and, for each class of preferred stock issued by the second company, Investor Preferred Equity, divided by Issuer Shareholders’ Equity. Under section 225.34(b)(2), Investor Common Equity is the greater of zero and the share of the second company’s common stock controlled by the first company multiplied by the amount of the second company’s balance sheet shareholders’ equity under U.S. generally accepted accounting principles (GAAP) that is not allocated to preferred stock. Investor Preferred Equity is, for each class of preferred stock issued by the second company, the greater of zero and the share of the class of preferred stock controlled by the first company multiplied by the amount of the second company’s balance sheet shareholders’ equity under U.S. GAAP that is allocated to the class of preferred stock. Issuer Shareholders’ Equity should be calculated as the sum of Investor Common Equity and Investor Preferred Equity for each person that controls equity instruments of the second company. Such an approach to the definition of Issuer Shareholders’ Equity ensures that the numerator and denominator used to determine a first company’s total equity ownership of a second company are both calculated in a consistent manner based on U.S. GAAP. Under this approach, a first company that controls less than one-third of each class of equity securities of a second company should always control less than one-third of the total equity of the second company. If Issuer Shareholders’ Equity would be equal to zero, and the first company controls more than one-third of a class of equity securities of the second company, Board staff should be consulted.

Q: What action should a company take if it has investments that predate the effective date of the Board’s control rule, have been treated by the company as noncontrolling, and trigger one or more of the presumptions of control in the control rule?
Posted: 9/30/2020
A: Consistent with the preamble to the control rule, the Board does not expect to revisit structures that have already been reviewed by the Board or a Federal Reserve Bank prior to the effective date of the control rule (85 FR at 12420).  For a structure that has not been reviewed by the Board or a Federal Reserve Bank, a company may contact Board staff to discuss the structure and what, if any, alterations should be made to continue to treat the structure as noncontrolling.  Board staff would not require alterations to structures that represent a reasonable interpretation of Board precedent at the time the structure was created.

Q: Is a contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the Bank Holding Company Act or Home Owners' Loan Act considered a limiting contractual right?
Posted: 9/30/2020
A: Consistent with the preamble to the control rule, a contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the Bank Holding Company Act or Home Owners' Loan Act generally would be considered a limiting contractual right as such a provision would provide the first company with a right to limit the ability of the second company to engage in some new lines of business (85 FR at 12417). However, a contractual provision that provides a first company with a reasonable and non-punitive mechanism to redeem, reduce, or restructure its investment in the second company if the second company fails to conform its activities to the activities restrictions of the Bank Holding Company Act or Home Owners' Loan Act generally would not be considered a limiting contractual right.

Q: If a market standard loan covenant in a loan agreement between a first company and a second company meets the definition of a limiting contractual right, is the loan covenant considered a limiting contractual right even though it is located in a loan agreement?
Posted: 9/30/2020
A: Consistent with the preamble to the control rule, a contractual provision that meets the definition of a limiting contractual right is a limiting contractual right (85 FR at 12418). The control rule does not differentiate between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides. The influence that a limiting contractual right provides its holder does not vary based on the circumstances of the right’s creation or the documentary location of the right. In particular, the control rule does not create any exception from the definition of a limiting contractual right for covenants in a loan agreement. Importantly, the control rule’s presumption of control related to limiting contractual rights does not apply where the first company controls less than five percent of any class of voting securities of the second company. As a result, loan covenants generally do not raise control concerns by themselves, but instead raise concerns when held by a first company that also controls a material percentage of the voting securities of a second company.

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Last Update: September 30, 2020